A Study On The Limitation And Improvement Of The Hypothetical Monopolist Test’s Implementation Method

The boundary of relevant market in general is assumed to be established in the study of Industrial Organization Economics and not be considered, but the definition of relevant market is very important for the implementation of relevant police, expecially for the anti-monopoly policy. Definition of relevant market is neither a separate system in antitrust law, nor a necessary step of market power assessing. But the economists have not been find an easier operation and accurate way to assess market power along with the development of antitrust regime, which leads definition of relevant market to be a "popular" method in the antitrust review. Definition of relevant market has penetrated all areas of the antitrust regime and has become a basic work to enforce the anti-monopoly policy as the starting point of antitrust case analysis. What’s more important, the sizes of relevant market affect the result of cases’ competitive effects to a large extent. Therefore, choosing a reasonable way of relevant market definition is important to implement the antitrust law effectively, so as for China who established antitrust regime for a short time.Compared with the traditional method of relevant market definition——the analysis of reasonable interchangeability and cross elasticity of demand, the hypothetical monopolist test ("HMT") not only provides a reasonable analysis framework. By quantifying the extent of product substitute in the same relevant market, it avoids the subjective arbitrary and uncertainty of the traditional method. The HMT can also became a quantitative tool for defining the relevant market and improve the accuracy of the definition result. For those reasons, many countries accepted the HMT since it is proposed.Though the HMT has obvious advantage and makes a great contribution to the development of relevant market definition, there are many obvious limitations in the process of implementing. Only a clear recognition of these limitations can let us apply this method correctly and find a more reasonable implementation method. This paper further explores the limitations and improvement methods in the implementation of HMT base on these understanding and the existing research results at home and abroad. In addition, this paper analysis the incorrect results that may cause by ignoring these limitations and introduces specific cases to detail these core issues.There are six parts in this article. Chapter1is the introduction, which provides a summary of current research situation on HMT, and also proposes the main issues of concern and the analysis framework. Chapter2describes the basic theory of relevant market definition and the basic meaning of the HMT. Chapter3describes two standard implementation tools of SSNIP test——Critical Elasticity Analysis and Critical Loss Analysis at first. Then, it further discusses the main dispute and correction of the Critical Loss Analysis. The standard SSNIP test always ignores the situation that existing price discrimination in the market and the chang of sales conditions out of candidate market change. Chapter4analysis deeply on the wrong result and improvement methods when the standard SSNIP test ignores the two factors mentioned above. Chapter5discusses the definition of relevant market in the two-sided market and analysis the existing problems and solutions when the standard one-sided market SSNIP test applying in two-sided market. Chapter6is the conclusion, a summary of this paper’s results.This study shows that, as a more effective method of defining the relevant market, SSNIP test also has some obvious limitations in exceptional cases. Firstly, the standard SSNIP test assumes that products in the candidate market are completely homogeneous and sales conditions out of candidate market are not change. But in Products Differentiated Market, these assumptions ignore the cases that consumers transfer to select products in the candidate market and the change of sales conditions out of candidate market, so it makes the standard SSNIP test define a too large relevant market. Secondly, consumers have different reflect to demand substitution in the price discrimination market, the standard SSNIP test will define a too large relevant market if we ignore the impact of this factor. Third, the characteristic of network externalities in the two-sided market weakened the level of demand substitution that estimated by the traditional economic theory, considering one side market only will result in the relevant market’s definition too narrow. In a word, one must solve those limitation problems of standard SSNIP test in particular cases, and then it can be used to define the relevant market reasonably and accurately.This paper does not stay on the basic understanding of the defect of HMT itself, such as the range of increasing price or the benchmark prices set by people which is the significant factors affecting the defining results. In the other hand, this paper analysis the limitations of the SSNIP test in particular deeply and systematically, which is important for the method applied correctly in practice. Meanwhile, the article does not discuss other alternatives methods when these limitations appear, but further focuses on possible improving method and attempts to perfect the HMT. Though the improving method is still not flawless, it is a positive attempt. The article mainly discusses the limitations and improvements of HMT from a theoretical view and introduces some cases appropriately to detail those issues. But the innovation of this article can be more prominent if it analysis more cases, particularly the cases that in the practice of China anti-monopoly regime.